Should I overpay my mortgage?

October 20, 2021
Information published was correct at the time of writing

Advantages and disadvantages of making overpayments

Overpaying on your mortgage can cut down the time it takes for you to repay the loan, and therefore the amount of interest you pay in total. If you’re beyond an introductory deal and are paying your lender’s standard variable rate (SVR), you can usually overpay by as much as you want.

Most lenders allow you to pay 10% of your mortgage balance as an overpayment per year if you’re still in your introductory fixed, tracker or discount period. However, the 10% rule is not universal.

But there are also downsides to be aware of. Some lenders may penalise those who try to overpay. Fees for paying too much can typically range between 1% and 5% of the amount overpaid, depending on your mortgage. But the fee you pay usually decreases the closer you are to the end of the fixed or discount period. The amount you pay as a penalty will vary between mortgage deals.

Why should you overpay on your mortgage?
There are several great reasons to make overpayments:

To repay the loan sooner
The faster you can repay the amount you borrowed, the sooner you’ll be debt-free. Many people dream of being mortgage-free and living without the burden of this monthly repayment schedule.

To pay less interest
Because interest accumulates over time, the total you pay in interest increases the longer you have the loan. So, repaying more quickly also reduces the total amount you repay, in most situations.

To make the best use out of your money
Interest rates are currently very low, meaning that most savings accounts may offer very little growth. If you have spare money, or have just received a windfall, you may be looking for a smarter way to use that money. Some of your options are: shopping around for a better interest rate, making a lump sum contribution to your pension, or making an overpayment on your mortgage.

When should you not overpay on your mortgage?
There are a number of reasons to think twice before making overpayments:

While you’re in your introductory period
Often, mortgage providers will charge you a penalty for making overpayments while you’re in the introductory period of your mortgage (for example, a two-year fixed rate). So, it’s less certain that you’ll benefit financially from making an overpayment, and you’ll need to make some calculations first.

If you’ve already made overpayments this year
Usually, mortgage providers will have a cap on how much you can overpay in a year. Making overpayments above this amount can result in financial penalties, potentially costing you thousands of pounds.

When you have higher-priority debts
Your mortgage repayments are likely to be among your highest monthly outgoings, but you may have other, higher-interest loan repayments. When you’re considering which to pay off first, this is a more important factor. So, if you have high-interest credit card debt, for example, look at reducing that before making mortgage overpayments.

If you don’t have enough savings
While your cash savings may not be growing much right now, it is still important to have some cash set aside for emergencies, especially as we’re living in unpredictable times. So, if your total savings would cover less than three to six months’ worth of living costs, it might be more sensible to hold onto them rather than overpay.

How do you make overpayments?
Check first with your mortgage provider to see how much you can overpay without additional fees. Most providers have an annual limit of 10% of the remaining balance, but yours could be more or less than that.

You’ll also want to check how your interest is calculated, so you can make your overpayment at the right time.

Sometimes your mortgage interest is calculated daily, in which case you’ll want to make the overpayment as soon as possible. In other cases, the interest is calculated annually. Then you’ll need to time your overpayment so that it’s counted in the annual calculation.

Usually, you can choose whether to make a lump-sum overpayment (best if you’ve had a windfall) or to pay a little more some months (best if you have extra money from overtime or commission). Speak to your mortgage provider about your options.

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